Are Platforms eating the world?

by John Reiners

I generally dislike hyperbole around the latest fad. Platforms are not even that new – in the 1960s, for example, credit cards and IBM’s system/360 were based on a platform business model. But several developments are making me think that this trend is worth closer study.

  1. Take a look at the world’s largest companies by market capitalization. The top four are young platform businesses (Apple, Alphabet, Microsoft, and Amazon). Just 5 years ago, only Apple and Microsoft made the top 10, which was dominated by banks and more traditional corporates in oil and gas and retail.
  2. Many established firms are making great efforts to establish platform businesses, like GE’s Predix platform for the industrial internet, Bosch, betting the company on establishing a platform for the Internet of Things (IoT) and IBM who are presenting their Watson cognitive solutions as a platform for developers, rather than as a software solution for clients.
  3. More and more research is being published on platforms’ important role in the digital economy. Some was published around 15 years ago, when the digital platform first came to people’s attention with the emergence of e-commerce. But in the last six months there has been a new wave of publications to understand how platforms work and the implications for business strategy. In January, The Center for Global Enterprise, published a survey estimating the size of the global platform economy as $ 43 trillion. March saw publication of Platform Revolution, by Parker, Van Alstyne and Choudray, summarised in the following month’s HBR. A conference hosted by MIT discussed the subject last week.

This research is helping to explain why, in the digital economy, network effects help the platform business model deliver much better financial returns than traditional businesses. For example, research by Deloitte calculated that platform businesses were the most efficient value creators (defined as market value divided by P/E ratio) of all business types, with a score of 8.2. This was more than four times greater than asset builders like Ford and Walmart (2.0) and far ahead of service providers like Accenture (2.6) and technology creators like Microsoft (4.8).

Platforms require a very different approach to business strategy. Traditional businesses typically aim to optimise the organizations’ own resources and use scale economies, perhaps through horizontal or vertical integration or alternative sourcing strategies, to gain a supply cost advantage. Platform businesses are concerned with optimizing the network and collaborating with others outside the firm to scale demand and benefit from network effects. Their strategic concerns will be issues like whether to keep the network open or closed and how to apportion value among ecosystem participants to incentivize behaviors. Traditional businesses’ planning processes are typically inward looking and based on an annual review cycle. A platform company’s strategy and role will typically shift over time as the platform evolves. It needs an agile strategy to adapt to the evolution of the network, adjusting the value proposition in response to changing community needs.

For me, this latest research prompts many interesting questions. Like, why are so many successful platform businesses US based and so few in Europe? What are the implications for future regional economic performance? How will different industries be impacted by platforms? What determines whether a dominant platform emerges or multiple competing platforms co-exist? How can you best balance innovation and global trade with the need for effective regulation protecting the rights of key stakeholder groups? What skill sets, organizational ways of working and culture are needed to build a platform business or manage the transition to one? And what are the implications for training and development given that university and business school curricula are largely based on the needs of the industrial age? I could go on.

Platforms aren’t eating the world. There will still be an important role for traditional business models. The spectacular returns currently enjoyed by platform companies will probably be moderated as a result of increased competition or regulation. But they are an important evolution, with significant implications for business strategy and public policy. We need to understand more.

John Reiners is Oxford Economics Managing Editor Thought Leadership, EMEA. He manages research programs on a wide range of topics, including digital economy and international trade. He also follows emerging trends, like artificial intelligence and employment. He can be contacted at jreiners@oxfordeconomics.com